Ep39 “Why Does the Non-Profit Model Work?” with Daniel Diermeier

Ep39 “Why Does the Non-Profit Model Work?” with Daniel Diermeier

Nonprofits vs. For-profit Organizations

  • Nonprofits lack a clearly defined party in whose interest the organization is being run, unlike for-profit organizations with residual claimants (shareholders).
  • The absence of a disciplining mechanism in nonprofits could lead to abuse.

Universities as Nonprofits

  • Universities are often run as nonprofits and have been successful despite the absence of a clear profit motive.
  • Universities have various stakeholders, including current students, faculty, administrators, and alumni.
  • Alumni seem to have a strong connection to their universities and are willing to donate time, effort, and money to them.
  • The reputation of a university is crucial for maintaining donations and involvement from alumni.
  • The reputation of a university responds slowly to changes, making it surprising that the nonprofit model works as well as it does.
  • Vanderbilt University's objective is to produce groundbreaking research and transformative education.
  • Universities are built for the long haul and focus on generating resources through quality work and reputation rather than storing away resources for the future.
  • The most successful universities focus on creating a positive feedback loop where excellence leads to reputation, which in turn attracts talent and resources, leading to further excellence.
  • A university's reputation is its most valuable asset and should be protected by being clear about the university's values and principles and communicating in a way that resonates with multiple stakeholders.
  • Balancing the interests of different stakeholders, such as students, faculty, alumni, and the general public, is a complex challenge for university leaders.

Funding and Governance

  • Nonprofits, including universities, rely on philanthropy and federal research support as sources of capital.
  • Their governance structures are designed to ensure that they stay on track with their mission without direct financial incentives.
  • Investment decisions should be made strategically, considering factors such as emerging fields, potential for eminence, and resource strength.

The Role of Alumni

  • Alumni have a deep and unique bond with their universities, which motivates them to care about the university's success and actively participate in its governance.

Advantages of the Nonprofit Model

  • The private model of funding through endowments allows universities to pursue their mission without being so dependent on public funding.
  • The research conducted by great universities generates a tremendous amount of social benefit, but the return on investment is not captured by the university.
  • Universities have a huge advantage over for-profit R&D shops and companies because of the multi-purpose use of research infrastructure and the education of graduate and undergraduate students.
  • For-profit organizations won't invest in research because they can't capture the positive externalities, whereas non-profit organizations don't care about not capturing the positive externalities, giving universities a competitive advantage.
  • The non-profit structure may be the right way to go after big problems that need to be solved in society rather than trying to discipline for-profit organizations with various mechanisms.

Overwhelmed by Endless Content?